In the past two decades, the percentage of Americans over 50 calling it quits on their marriage has doubled, and the percentage among the 65 plus set has more than doubled, according to a study at Bowling Green University (Susan L. Brown & I-Fen Lin), as cited in the Washington Post.
If you’re considering divorce post-fifty or are in the process, what are the financial implications and how can you protect your future?
Chairman and CEO of Edelman Financial Services, Ric Edelman, three times ranked Independent Financial Advisor (Barron’s) and #1 New York Times bestselling author, shares mismanagement or misappropriation of money is a leading cause of divorce, often used as an emotional and financial weapon.
If you’re in the middle of “grey divorce,” Edelman says you need to recognize that your financial future is radically different because of divorce and you must protect yourself.
"The biggest mistake I find that women make is they underestimate the importance of financial negotiations and overestimate the talents of their attorney. Lawyers are trained in law and not as well on the financial side of divorce," shares Edelman. "Women may have been focused on the children, lifestyle and home, and not aware of the financial complexities. They rely on attorneys who may be unfamiliar with how to effectively negotiate for an appropriate allocation of the household’s wealth."
For example, he says, in splitting assets, every dollar is not an equal dollar. “A dollar in an IRA is not equal to a dollar in a bank account; a dollar in stocks is not equal to a dollar in a mutual fund; a dollar in an annuity isn’t the same as a dollar in home equity,” Edelman explains. “There’s liquidity and also tax and risk issues with every asset. Lawyers aren’t trained in these nuances and that can translate to severe imbalances. It’s crucial to know the consequences.”
Edelman gives examples:
A husband and wife have a total net worth of $500 K; $250 K in bank CDs and $250 K in IRAs. The husband takes the bank CDs and the wife takes the IRA. The wife doesn’t realize if she withdraws from the IRA before she’s 59-and-a-half, she may lose 40 percent in tax consequences while the husband has no tax liability for the CDs.
In another example, if the husband keeps stocks in a brokerage account that have a very high basis and allocates the low-basis stocks to the wife, when he sells stocks, he may pay nothing in tax while the wife may pay the maximum tax.
Valuation of Business:
The valuation of a business owned by one spouse may also have implications. “I was recently dealing with a case where the husband owned a business owner. He had allocated his business at zero and the wife’s attorney didn’t object. There was no outside advisor at the time of the divorce. We came to learn he had earned $130,000 the previous year. If valued at twice the income, the business should be valued at almost a quarter million.”
Keeping the House:
When allocating assets, the house might not be equally valued to other assets. Edelman says a house isn’t liquid, and carries tax implications and costs such as repair, upkeep, insurance, and mortgage payments. A stock portfolio has none of that.
Dividing retirement assets can be especially complicated. Edelman gives the example of transferring half of a 401K in the divorce negotiation, which he says cannot be done with a court order or Qualified Domestic Relation Order (QDRO) by a judge. If a husband gives a wife half of his IRA, he may incur taxes on distribution, plus a ten percent IRS penalty if he’s under 59-and-a-half.
Divorcing at midlife or grey divorce doesn’t necessarily have to be a financial quagmire if you have the right information about asset allocation, tax implications, and other issues from a team that includes a financial advisor or consultant.
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